Simon Johnson, a senior fellow at the Peterson Institute for International Economics, is the former chief economist at the International Monetary Fund.
There is much to worry about in President Obama’s financial regulation proposal, officially unveiled on Wednesday. It’s a long wish list, but intense and nontransparent financial sector lobbying already ensured that four out of the five sets of measures are unlikely to have any lasting positive impact.
As Stephen Labaton reports:
“In the last two weeks alone, the administration has heard from top executives from Goldman Sachs, MetLife, Allstate, JPMorgan Chase, Credit Suisse, Citigroup, Barclays, UBS, Deutsche Bank, Morgan Stanley, Travelers, Prudential and Wells Fargo, among others. Administration officials also discussed the president’s plan with the top lobbyists at major financial trade associations in Washington.”
What is the outcome of all this behind-the-scenes maneuvering to get the financial sector fully on board? Not much change that we can really believe in.
For example, take the points that President Obama himself stresses (e.g., in this interview). First and foremost, he says the Federal Reserve will become the official “system risk regulator” (section 1 of his proposal). But in principle the Fed had exactly this kind of leadership role before — and under both Alan Greenspan and Ben Bernanke it was a reckless cheerleader and facilitator for the unsustainable real estate boom.
If the Fed had been stronger before, the crisis now would be worse.
Hedge funds and other private pools of capital have to register with the Securities and Exchange Commission, also in section 1. But the once-proud S.E.C. has fallen on hard times, effectively just as much captured by the intellectual bubble of Wall Street as all our other regulators.
Originators of securitized products will be required to retain some stake in what they issue (section 2). But the major shock of early 2008 was when we learned that Bear Stearns, Lehman Brothers, and others had done exactly that. There is no serious attempt here to recognize that our leading financial firms have completely failed in their efforts to measure and control risks.
In addition, the administration will now seek a “resolution authority” that makes it easier to take over and shut down large financial companies (section 4 in the proposal). But effectively they had this power before — Continental Illinois, for example, was handled as a negotiated conservatorship in the 1980s, and Citigroup could have been taken over at various points in the past nine months. The government blinked in the face of financial sector complexity and scale. “Too big to fail” is “too big to exist,” but the president’s document goes nowhere near this fundamental principle.
And while the proposal is no doubt right to emphasize the need for international cooperation in re-regulation, section 5 is so vague as to be meaningless.
There is, however, one interesting piece — the creation of a Consumer Financial Protection Agency (section 3). The president himself seems to recognize that previous consumer protection was scattered and ineffectual. A strong agency could help protect us all both in boom times and during crises.
But protecting consumers is not the same thing as protecting investors and taxpayers. Major financial players will once again be able to float bubbles, creating the illusion of growth and the reality of further expensive bailouts.
Our financial sector has become very powerful politically — and these proposals are a further sad reminder of that fact.
The Defanging of Obama’s Regulation Plan – Simon Johnson, Economix
Obamanomics has begun to fade
A string of new polls seems to show that America’s belief in the wonder-working power of Obamanomics has begun to fade. A Pew poll found President Obama’s economic approval rating has fallen to 52 percent from 60 percent in April. A Wall Street Journal poll found 53 percent disapprove of his handling of GM and Chrysler vs. 39 who approve. And the New York Times found that 60 percent don’t think Obama has a “clear plan” to deal with the monstrous budget deficit.
Okay, here’s the thing: Obama took a tremendous economic and political gamble last January. The new president had the option of putting forward a stimulus plan that would attempt to reverse or significantly dampen America’s terrible economic downturn ASAP. The quickest and most effective approach would have been a big cut in payroll taxes. For $800 billion, combined Social Security and Medicare taxes could have been slashed by 6 percentage points, or 40 percent. That would have put $1,500 in worker paychecks and, according to one credible study, increased employment by 4 million jobs in 2009.
Instead, Obama chose to listen to Rahm “Never let a crisis to go waste” Emanuel and put forward an $800 billion plan that advanced his healthcare, energy and education policy goals — but pretty much neglected the economy in 2009. Team Obama had to fully understand this. Indeed, a study from the Congressional Budget Office study — when led by current Obama budget chief Peter Orszag — concluded that an Obama-like economic stimulus package would be “totally impractical” because it would take so long to implement. (True enough, only seven percent of the American Recovery and Reinvestment Act has been doled out so far.)
Presidential gamble. In short, Obama wagered that the deluge of money coming from the Federal Reserve would do the heavy lifting as far as stabilizing the financial sector and keeping the already apparent recession from turning into a real disaster. Voters would, thus, continue to support his policies to assert more government control over healthcare, heavily regulate energy through a costly cap-and-trade program and further intervene into the financial industry.
The gamble appears to have failed miserably, both economically and politically. The terrible tale of the tape: a) the current downturn is arguably the worse since the Great Depression; b) household wealth has fallen by $14 trillion during the past two years, including the first quarter of 2009; c) while the economy may not shrink as much this quarter as it did in the previous three months (-5.7 percent) or the final quarter of 2008 (-6.3 percent), unemployment is soaring; d) Obama himself said the jobless rate will hit 10 percent this year; d) even worse, the Federal Reserve sees it approaching 11 percent next year. (Recall, that the original White House economic analysis of the Obama economic plan never saw unemployment exceeding 8 percent if Obamanomics was passed by Congress.)
Falling public support. So now many Americans are rightfully wondering just what they are getting for that $800 billion, as well as massive budget deficits as far as the eye can see. And it goes beyond the mercurial world of polling. Pricey plans to deal with perceived climate change and healthcare are also appear on the ropes or are being scaled back as voters view them as lower priorities than job creation and taming out-of-control spending.
Green shoots? Oh there are some to be sure. Just yesterday, the Conference Board said its index of leading economic indicators rose by its biggest monthly amount in five years And the stock market is up nearly 40 percent from its lows as depression fears ebb. Gluskin Sheff economist David Rosenberg, by contrast, declares that the “era of the green shoots is over.” He points out that 1) bellwether FedEx described the economy as “extremely difficult” when it reported disappointing earnings , 2) United Airlines said second quarter traffic fell as much at 10.5 percent, 3) commercial real estate loan concerns led S&P to cut ratings on 22 non-”too big too fail” regional banks; 4) incomes are being pinched by rising gas prices, and 5) surging interest rates are refreezing the housing market.
Too little, too late. Then, of course, there is rising unemployment, which is either a lagging indicator of an economy slowly on the mend or a forward indicator of a possible double-dip recession. Either way, it takes a long time for economic perceptions to change after a nasty downturn. Just ask all those congressional Democrats who lost their jobs in 1994. Even though the economy had then been growing for 14 straight quarters since the 1990-91 recession and the unemployment rate was down to 5.8 percent from a high of 7.8 percent, 72 percent of Americans still thought the economy was “fair” or “poor” and 66 percent though the nation was headed in the wrong direction. What do you think the national mood will be like on Election Day 2010 if unemployment is over 10 percent, gas prices near $4.00 a gallon and homes prices moribund? Certainly by then, the effectiveness of the “Blame Bush” mantra will have hit its expiration date for Obama and the rest of the Democratic Party.
Why Obama’s Economic Gamble Is Failing – James Pethokoukis, Reuters